Mazars warns of employee share option pitfalls

Mazar‘s Edward Haygarth has warned companies to use suitable methods for
calculating employee share options or run the risk of producing inaccurate
valuations.

In a letter to the Financial Times, Haygarth said it was too late
for companies to try and change IFRS2, the international accounting standard
requiring share options to be expensed.

‘The time has passed for justifying whether an expense should be recognised
for share options granted to employees,’ Haygarth said. ‘The International
Accounting Standards Board has made its decision and, with its position
considerably strengthened by the Financial Accounting Standards Board’s adoption
of a similar rule in the US, is highly unlikely to change tack.’

Instead, companies needed to focus ‘on educating their investors and dealing
with the practicalities of the new accounting standard’.

Haygarth said the Black Scholes method, the traditional way of valuing
commercially traded share options, was not appropriate for calculating employee
share options, which had longer commercially traded options and were regularly
subject to vesting conditions.

Haygarth said companies should use the binomial probability model, which took
these factors into account, to work out employee share options.

‘Remunerating employees via the granting of share options should continue,
but for companies to benefit by the new rules they will have to explain the
nature of the changes carefully and how the expense has been calculated,’
Haygarth said.